Auctions to phase out coal power: Lessons learned from Germany

Abstract

This study assesses the extent to which auctions for compensation payments are a suitable policy instrument for ending coal-fired power generation at minimum cost and thus achieving national climate targets. Germany is the first country to apply such a market-based mechanism. Evaluating the effectiveness and efficiency of the auction, we find that the first five of seven auction rounds will retire 10 GW of coal-fired capacity at a cost of 68 ± 5 EUR/kW, corresponding to an additional carbon price of 2.4 ± 0.2 EUR/tCO2. The possibility of administratively shutting down power plants from 2024 and a decreasing ceiling price have ensured that average compensation payments are well below the ceiling price, and low compared to other policies, even though there was no competition in two of five auction rounds. As the government cancels the freed emission allowances, the policy will result in lower emissions, even though the carbon intensity of the German coal power fleet increased slightly by 2%. Thus, the German auctions can serve as a model for national phase-out strategies in countries with similar institutional frameworks and provide a reference case for integrating conflicting policy objectives into auctions.